Banks Permitted to Operate With Lower Capital Levels : Agencies Relax Farm Loan Rules

Under strong pressure from Congress, three federal regulatory agencies significantly relaxed restrictions on farm loans Tuesday in an attempt to ease the severe strain on many agricultural banks and their borrowers.

The action, taken amid the worst rash of rural bankruptcies since the Great Depression, was praised by groups representing farmers and bankers.

“This has to be a favorable move,” said Bob Mullins, a lobbyist for the National Farmers Union. “Parts of the country are already in the planting season, and all the lending institutions are getting much tougher on loans this year.”

The plan to ease the loan burden was outlined by officials of the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Comptroller of the Currency at a Senate Banking Committee hearing. Its most important step, permitting troubled banks to operate with lower levels of capital so that they can maintain their lending activity, is similar to legislation that has been advancing rapidly in the Senate.

It is unclear whether the steps, details of which still must be worked out, will make further congressional action unnecessary.

“We are encouraged by the action of the banking regulators,” said Donald T. Senterfitt, president of the American Bankers Assn. “By being provided some breathing room, bankers will be able to help their farm customers stay in business and work toward stabilization of the total farm economy.”

Similarly, Weldon Barton, agricultural representative of the Independent Bankers Assn. of America, said that “we’re certainly encouraged. . . . This will give increased confidence to farm banks that they can continue financing (troubled) farmers.”

Change Accounting Methods

An aide to Sen. Alan Dixon (D-Ill.), sponsor of a leading bank relief measure, called the regulatory steps significant but said that the committee still may need to take action nailing down the new policies.

The steps involve changes in accounting techniques that have the effect of allowing banks to go farther out on a limb when making new loans or restructuring old ones.

The key step calls for “capital forbearance”--permitting banks to operate with capital at levels below current requirements. The idea was endorsed by Comptroller of the Currency Robert L. Clarke; L. William Seidman, chairman of the Federal Deposit Insurance Corp., and Preston Martin, vice chairman of the Federal Reserve Board.

Although details were not announced, Seidman and Clarke advocated letting banks charge farm loan losses to a special account that would be amortized over five years. The idea would be to give banks and their farmer borrowers five years to make up losses. The proposal is similar to Dixon’s legislation, which calls for allowing banks to write off loan losses over 10 years.

But Clarke, Seidman and Martin termed the Dixon approach dangerous because the accounting technique in it would more readily conceal a bank’s slide into bankruptcy, thus posing a bigger threat to the federal deposit insurance system.

Another step announced by the regulators would allow banks to restructure loans without showing losses on their books.

“This would help marginal farmers who can’t meet cash-flow loan requirements now but might meet stretched-out payments at lowered interest rates or principal,” said William Mattea, an aide to Dixon.